For several years, since my book was published in June 2011, I have been writing a blog elaborating ideas that are in my book. This entry is my third blog on the theory of consumer choice. I think it is largely self-contained, but if you want to see Parts I and II, please visit my web site at objectiveeconomics.net. I have chosen to post my blogs on The Forum in order to extend my audience and perhaps elicit some helpful comments. If you have something to say, I hope you will respond to this post.

The theory of consumer choice in modern economics is a theory of utility maximization. if you know anything about that theory, you need to be warned that you will not find anything resembling it here.

Northrup

The Theory of Consumer Choice III

By M. Northrup Buechner

July 31, 2013

Another in a series of essays elaborating Objective Economics: How Ayn Rand’s Philosophy Changes Everything about Economics by the author.

I concluded my last blog by saying that a valid theory of consumer choice requires the concept of “a hierarchy of values.” I should also have said that consumer choice is not unique, that all human choices reflect an individual’s hierarchy of values to some extent. Since consumer choice is a subdivision of human choice, it is easier to understand the former if we first understand the latter.

The meaning of a hierarchy of values depends on grasping the two concepts of which it is composed. Let us begin with the concept of “hierarchy.” There are other definitions of hierarchy, but the one I prefer is “a graded or ranked series, one thing above another.” (I have been using this definition for so long that I have forgotten its origin.)

Hierarchies are everywhere in the world that one choses to look for them. There are the ranks of authority in the Catholic Church (priests, bishops, cardinals, archbishops, patriarchs, etc.). All the military services have hierarchies of command (in the army: private, corporal, sergeant, sergeant major, 2nd lieutenant, lieutenant, captain, etc.). Universities have hierarchies of (presumed) knowledge (instructor, assistant professor, associate professor, full professor). The students in a college or university are ranked in a hierarchy according to their grade-point average. Investors exist in a hierarchy defined by their wealth. The list is endless.

Having grasped the meaning of hierarchy, we need to grasp the concept of values. Let us begin with Ayn Rand’s definition of value: “that which one acts to gain and/or keep.” A value, in this sense, is a goal, end, or purpose that one acts to reach or attain. Usually it is a fact of external existence, such as a house, a car, or an ice cream cone, but it can also be an aspect of consciousness that one strives to achieve, for example, happiness, or virtues such as pride and integrity.

A value presupposes an evaluation, that is, an act of consciousness that gives the object a positive ranking. An evaluation in turn presupposes a standard or end to which the value is a means. Evaluation is the process of ranking things by whether they cohere with a standard or contradict it, and to what extent.

When several items are ranked by reference to the same standard, we get a hierarchy. If the standard is “getting ahead at work,” then the hierarchy might be (1) volunteer for jobs; (2) work long hours; (3) an MBA. If the standard is rational, if the standard is, in the words of Ayn Rand, “derived from the facts of reality and validated by a process of reason” (CUI, p. 14), then the values are objective. If one also ranks objectively the values in the hierarchy, then action based on that hierarchy will serve one’s life.

In these blogs, sometimes I have referred to “the value placed on an object.” When I have used that phrase, I thought the context made the meaning clear, or at least clear enough that my audience would not be troubled. (I would like to hear from anyone who cares to confirm or deny my judgment on that.) But until now, I have not defined value in the sense of value placed on something—which certainly is not the meaning Ayn Rand defined.

Now I can say exactly what that value is: It is the ranking of the object in a hierarchy of values. A hierarchy of values is a phenomenon of consciousness. The values ranked in the hierarchy are phenomena of existence, in exactly the meaning Ayn Rand defined: goals of action, things one wants to gain and/or keep (including things like happiness, integrity, and pride). The value placed on values is their ranking in one’s mind.

Clearly, there are two concepts of value here. First, there are the things one acts to gain and/or keep—objects of action in reality; for example, “Water is a value to a thirsty man.” Second, there is the ranking of those values in consciousness—in a hierarchy of values; for example, “Water has a high value to a thirsty man.”

Metaphysically, values as ends of action come first; a hierarchy of values cannot be grasped without the concept of values as goals of action in reality. The “values” in a hierarchy of “values” are the values Ayn Rand defined. Existence comes before consciousness.

Causally, values presuppose evaluation by a human mind. To create a value, someone evaluates an item as valuable according to some standard, and gives that goal positive ranking in a hierarchy. Simultaneously with that evaluation, the item becomes a value to that person.

Next time we will elaborate further the idea of a hierarchy of values, and begin the process of understanding human choice.

]]>14069Sat, 10 Aug 2013 18:29:19 +0000Foreign Exchangehttp://forums.4aynrandfans.com/index.php?/topic/13569-foreign-exchange/The area of economics/finance in which I am most ignorant is foreign exchange. I got a copy of an economics book from the college where I teach part time, figuring I'd get the basics before attempting a book devoted only to that topic. The book Is Gwartney & Stroop, widely used. The first thing that catches my minds eye is an entire chapter devoted to Keynes, fawning over his brilliance. Knowing so little that I wouldn't recognize any Keynesian influence on their foreign exchange analyis, I decided to enter a plea here for some good referneces on the subject. THX!
]]>13569Sun, 01 Apr 2012 15:52:43 +0000Are Professional Athletes Economically Productive?http://forums.4aynrandfans.com/index.php?/topic/13194-are-professional-athletes-economically-productive/Just to be clear - not in any subsidiary activity, such as investing their huge wages; I mean in their primary activity, playing baseball or whatever. Are movie stars and TV personalities economically productive?
]]>13194Fri, 08 Jul 2011 13:33:08 +0000Do Unions Play a Role in Economic Development?http://forums.4aynrandfans.com/index.php?/topic/13992-do-unions-play-a-role-in-economic-development/It is common to hear from the left that we have unions to thank for ending child labor, improving working conditions, shortening the work week, etc. I realize that none of these things are possible without first having productivity. The harsh lifestyle man once had to endure was ended by the production of capitalism, not unions. But it is also common to hear people reply that unions were once of value but have since served their purpose and aren't needed anymore.

Is this true? Did unions once serve a valuable purpose in improving people's quality of life?

Here's a plausible answer the union advocate might make. As capitalism was starting to have a significant economic impact, the result in the beginning was a relatively small number of rich people with many people still living with little wealth. In a free market, there will be competition between the capitalists for the good labor, and there will be a resulting net rise in wages. But there will be some lag time between the wealth production and the rise of average wages. It's during this relatively short period that unions step in, demand more, and the result is a net rise in wages. The unions then take the credit for rise in standard of living (similarly to how they and/or the government take credit for ending child labor).

But is this true? I don't know enough about the history to know if this is how it played out.

I can also imagine that it was the case that the competition among individuals alone (following increased productivity of course) was enough to result in the rise of wages and quality of working conditions.

I have never explained anything political to my 1st grade son. However, I've recently noticed recently that he is quick to exclaim "Dad! There's Obama" anytime he shows up on the news. At dinner last night I heard a child that looked to be my sons age (1st grade) at the next table loudly proclaim, "Oh, I voted for Barack Obama!" It's very apparent that my son is learning something about this subject at school, the problem is, I'm not sure it's a lesson I approve of.

He's like his Daddy, and pretty quick with the math, so I guess it's time for a lesson on economics. So here's my plan.

He has a list of tasks to do, and he gets a "bonus" for his report card. His payment isn't flat, he actually gets paid for individual activities, so if he accomplishes more, he gets a larger "paycheck". I want him to learn the value of not just "hard work", but more importantly the value of accomplishing something.

"The Obama Plan"

For his next paycheck, I'm planning on implementing a progressive tax system. I haven't figured out all the details yet, but I want to make it so, with a decent amount of effort, he can and exceed the highest tax bracket in a pay period. I'll make the tax reflect a simple version of the system set to take effect in Jan so that he'll pay 39.6% tax in the highest tax bracket. I will keep things simple, and label this the "Obama Plan". I want him to put consequences on the face he sees. I want him to understand that the picture they'll showing at his school and clapping about does things to HIM personally.

To keep the numbers simple, and not need to change his current pay scale I'm going to make the brackets like so.

$0-$3 - no taxes

$3-$7 - 10%

$7-$10 - 30%

$10 an up - 40%

This means that if he makes $7 (a pretty normal week), he'll "take home" $4.90. If he makes $10 (he worked extra hard), he'll take home $6, an impressive $1.90 for the extra 5 or 6 tasks he had to do to "earn" the additional $3. He's a pretty bright kid mathematically, and I'd be willing to bet that he'll quickly learn that working for that extra $3 doesn't have the return that working for the original $3 does.

Every payday, before he gets his money, I'll tax his taxes, and I will explain how the politicians decide to do this. I'll also run through the same gross pay under the other plan I discuss below.

"The Other Plan"

After a few pay periods of the progressive tax system, I'll implement Hermain Cains 9/9/9 plan with him. This is quite a bit simpler, since he's not running a business. I'll tax him 9% at payday, and 9% when he spends it. This means that he'll get $8.20 of buying power for that $10 he earns on a good week. I'm not yet sure what to label this plan since the Republican party never embraced this plan, only a lower version of the current progressive tax plan, so I'm open to suggestions.

After he's gotten both tax plans, I'm going to ask him which one he prefers.

This is gunna kill me, because I'm so proud of the way he runs upstairs to do "chores" and looks forward to "payday". But being a good parent is more than hugs and kisses, it's about teaching life lessons. It'll be a cold day in hell when I let the public school system teach my son their perverted version of morality.

]]>13848Thu, 08 Nov 2012 15:57:41 +0000Interest Rates and Inflationhttp://forums.4aynrandfans.com/index.php?/topic/13981-interest-rates-and-inflation/Yaron Brook in his recent debate at Loyola made the point that when you keep interest rates below the rate of inflation for as long as we have, a financial crisis is imminent. I don't understand this point. Would someone briefly explain this?
]]>13981Tue, 19 Mar 2013 05:12:05 +0000Confusion about fractional reserve bankinghttp://forums.4aynrandfans.com/index.php?/topic/13450-confusion-about-fractional-reserve-banking/I’m very confused by the idea that fractional reserve banking leads to inflation of the money supply, which I’ve heard from multiple sources. So I’m going to describe what I understand of the system, and please let me know where or if I’ve gone wrong.

Fractional reserve banking means that a bank holds only a portion of its deposits, and lends out the remaining with the expectation of earning back interest. It could certainly issue credit in amounts above that held in the bank, but not in excess of its total assets (what is held in reserve plus the amount lent and the expected interest earned). So, if we were talking about banking on the gold standard, a bank could issue notes for more gold than it has, but not more than it expects collect.

From what I’ve read, the “inflation” refers to the fact that the original depositor was given a note of credit for their gold, and now the person receiving the loan has also received one. So they both received a note to claim the same gold. But that’s what creates the debt! The amount of notes in excess of the amount of gold represents the money that it is owed by customers. I think what’s missing here is the bank didn’t pretend to create money, it created a debt of that amount of gold, which the debtor is responsible for repaying. Say he borrowed the money to start a business. Well, he spends the money he got, but then he earns it back from his customers and pays it to the bank – plus interest. So in the end all of those notes are accounted for. And just as what happened during the time of silver and gold certificates issued by the Treasury, if someone redeems a note by taking gold out of the bank, that note is destroyed.

The only ways I know of that fractional reserve can lead to inflation is through 1) bank accounting fraud or 2) fiat money, since the notes would never be redeemed for anything and re-circulated instead.

And I thought fractional reserve banking was what made bank loans even possible. If a bank has to keep 100% of its deposits in reserve, then where is it getting the money to loan out?

The main reason I wanted to start this topic is an Objectivist I know was arguing against the fractional reserve system, but he didn’t seem to understand anything I was saying and resorted to intimidation. If I’m wrong about this I’d like to know, but I can’t deal with people like that.

]]>13450Fri, 30 Dec 2011 16:50:15 +0000Economic Growth in Chinahttp://forums.4aynrandfans.com/index.php?/topic/13678-economic-growth-in-china/One argument that is used to support free markets is to point out that states or countries that are more free tend to be more prosperous. It is often pointed out now that California and Illinois are two states that are in financial trouble because of statist regulations, America rose to great power relatively quickly due to its freedom, and East and West Berlin were great examples as well.

Given this, how would one account for China's growth? It is now has one of the largest economies despite a communist regime in power over the last few decades.

]]>13678Mon, 02 Jul 2012 20:17:11 +0000Another Greenspan nuggethttp://forums.4aynrandfans.com/index.php?/topic/13260-another-greenspan-nugget/Earlier this week I heard Allan Stadler Greenspan claim that the hysteria over a possible US default was luny. ~"The US would never default. All we'd have to do is print more money."
]]>13260Thu, 11 Aug 2011 15:10:55 +0000Second Quarter Economic Reviewhttp://forums.4aynrandfans.com/index.php?/topic/13706-second-quarter-economic-review/Van Hoisington and Lacy Hunt provide clear, cogent and intellectually sound commentary on current conditions and the outlook.

]]>13706Sun, 22 Jul 2012 19:00:53 +0000Bubble on the Potomachttp://forums.4aynrandfans.com/index.php?/topic/13637-bubble-on-the-potomac/Which city has an unemployment rate of 5.5%, office rental rates of $50 per square foot, is the richest metropolitan area in the US, a median household income over $80,000 (in 2010), is surrounded by 9 of the 15 richest counties in the country, and has the highest percentage of 25-to-34-year-olds in the U.S.?

The new affluence flooding the nation’s capital sets it a world apart from the country it governs

By Andrew Ferguson

The Passenger Bar, about 12 blocks from the White House, is just beginning the first seating of the night in its Columbia Room, a semisecret speakeasy behind an unmarked door in the back. Speakeasies are very fashionable in Washington at the moment—bars within bars, inner sanctums set aside for the most discriminating palates. But the Columbia Room is a particularly hot ticket. If you’re lucky, you’ll get a reservation a few days in advance. For $67 a head, an expert bartender serves a three-course tasting of cocktails. He carves a thick slice of lemon rind, places his hands slightly above and 10 inches back from the cocktail glass and with a snapping motion sends a scattering of lemon drops across the icy surface of what one magazine calls “the best martini in America.”

The Passenger’s motto? “God save the district.” The sentiment is easy to understand, for these are good times in Washington and the seven counties that surround it. Even as the nation struggles, the capital has prospered, making it a magnet for young hipsters but leaving its residents with only a tentative understanding of how the rest of the country lives. “It’s nice,” goes the old joke about Miami, “because it’s so close to the United States.” Well, Washington is very nice these days.

Every week brings fresh evidence of continuing prosperity: a new restaurant, a new nightclub, another restored 19th century townhouse in a previously dodgy neighborhood selling for $1 million or more. Start-ups are hiring through Craigs­list, and just opened lobbying firms have no trouble collaring clients. Storefronts that stood abandoned five years ago fill with pricey gourmet-food shops like Cowgirl Creamery, a cheese­monger that has opened its only store outside Northern California on F Street downtown. Its Mt. Tam cheese goes for more than $25 per pound. It’s organic.

Another Northern California import, a limousine service called Uber, launched in December after great success in San Francisco and New York City. “The growth here has been unique in our experience,” says Rachel Holt, who oversees Uber’s burgeoning D.C. operation. Uber is Web-based and cashless: customers call for limos with a smart-phone app and pay with a credit card on file. It’s also deluxe. Riders expect nothing lower on the limo food chain than a Town Car, with offerings going up to Mercedes and beyond. Holt says with some ­surprise that locals are using Uber as everyday conveyance for commuting and shopping. Uber exploits Washington’s unique combination of heavy use of social media, a young and often carless population and customers with fistfuls of disposable income. When the D.C. taxi commission made a move to shut down Uber earlier this year, Twitter erupted in indignation under the hashtag #Never­goingback. Welcome to über-Washington.

The Good Life

Other big cities, of course, have made it through the recession in one piece. But few eased through the crash as lightly as D.C., much less prospered so widely on the rebound. The local unemployment rate, at 5.5%, stands well below the national figure of 8.2%. The region’s foreclosure rates have always been significantly lower than those elsewhere, and now housing prices in D.C. and across the river in the Virginia suburbs of Arlington and ­Alexandria are close to their precrash peaks. The ­Association of Foreign Investors in Real Estate—in Washington, everyone has an association—ranks the region as one of the best investments in the world, right after London and New York City. The cost of office space in Washington rivals New York prices, averaging $50 a square foot.

How’s a country to make sense of a national capital whose day-to-day life is so much more upholstered than its own? Increasingly, it cannot. Recently Washington passed San Jose in Silicon Valley to become the richest metropolitan area in the U.S. Since the 1990s, says economist Stephen Fuller of George Mason University, the region has led the nation’s metropolitan areas in overall employment rate. The median household income in the metro area in 2010 was $84,523, according to calculations by Bloomberg News, nearly 70% over the national median household income of $50,046. Nine of the 15 richest counties in the country surround Washington, including Nos. 1, 3, 4 and 5. Per capita income in D.C. is more than twice that in Maine. All this explains why Gallup’s Well-Being Index rates D.C. as the most satisfied large metropolitan ­area in the U.S. The pollsters were especially ­impressed with the region’s low smoking rate (15%) and the 72% who visit the dentist annually for a checkup. Washingtonians are skinnier, exercise more, eat more vegetables and are more likely to have health insurance than the average American. They’re also more optimistic—about the economy and about the future in general.

The riches reflect a regional economy as resilient—and as strange—as any in the world. “We don’t make anything here,” Fuller says simply. Washington is one of the few metropolitan areas in the country that have no significant manufacturing sector, placing it alongside Atlantic City, N.J.; Myrtle Beach, S.C.; Cape Cod, Massachusetts; and Ocean City, N.J. “There isn’t any single major industry,” says Jim Dinegar, president of the Greater Washington Board of Trade. “We’re just very diverse.”

The District of Contracting

Yet the diversity of the Washington economy is an illusion, for each of its business sectors is to some degree a creature of the region’s single great industry—the federal government. According to a 2007 report by the Tax Foundation, for every dollar in taxes Washington sends to the federal government, it receives five in return. Fuller says that over the past 30 years, the federal government has spent $860 billion in the D.C. region, two-thirds of that since 9/11.

Why the boom? The size of the nonmilitary, nonpostal federal workforce has stayed relatively stable since the 1960s. What has changed is not the government payroll but the number of government contractors. It’s estimated that, thanks to massive outsourcing over the past 20 years by the Clinton and Bush administrations, there are two government contractors for every worker directly employed by the government. Federal contracting is the region’s great growth industry. A government contractor can even hire contractors for help in getting more government contracts. You could call those guys ­government-contract contractors.

Which means government hasn’t shrunk; it’s just changed clothes (and pretty nice clothes they are). The contractors are famous for secrecy; many have job titles that are designed to bewilder. What is it, after all, that an analyst, a facilitator, a consultant, an adviser, a strategist actually does to earn his or her paycheck? Champions of the capital’s Shangri-la economy like to brag of ­Washington’s knowledge workers.

Peter Corbett isn’t so sure about the wisdom of D.C.’s version of the knowledge economy. Corbett heads a social-media marketing company, with corporate clients that have famous names. Most of his work involves nonprofit foundations that have flocked to Washington to be close to the fount of grants and tax breaks. He did a single project for the federal government and then swore it off for good. He describes his first meeting at the Pentagon. “There are 12 people sitting around the table,” he says. “I didn’t know eight of them. I said, ‘Who are you?’ They say, ‘I’m with Booz Allen.’ ‘I’m with Lockheed.’ ‘I’m with CACI.’ ‘But why are you here?’ ‘We’re consultants on your project.’ I said, ‘You are?’ They were charging the government $300 an hour, and I had no idea what they were doing, and neither did they. They were just there. So I just ignored them and did my project with my own people.”

Aside from its wealth, the single defining feature of über-Washington is its youth. Most of the people who have moved to Washington since 2006 have been under 35; the region has the highest ­percentage of 25-to-34-year-olds in the U.S. “We’re a mecca for young people,” Fuller says. One recent arrival says word has gotten out to new graduates that Washington is where the work is. “It’s a place where a ­liberal-arts major can still get a job,” she says, “because you don’t need a particular skill.”

The Conveyor Belt

The young fill entire neighborhoods with an undergraduate air. On a warm night in Clarendon in northern Virginia or in the H Street NE corridor, with the crowded sidewalks and lines outside the door-to-door bars, you might think you’ve landed on fraternity row in Chapel Hill, N.C., or Charlottesville, Va. They’ve brought the college lifestyle with them—group houses, hookups, late-night cram sessions and lots of drinking. The local drugstores seem to devote more shelf space to condoms and pregnancy tests than diapers and formula. (Another big seller at pharmacies: Pedialyte, used as the ultimate hangover cure.)

No one doubts that the kids are changing the city. When Shana Glickfield, founder of a social-media firm, arrived in Washington in the early 2000s, one of her ears was triple-pierced. “I had to go up on [Capitol] Hill, and everybody said, You can’t do that, not if you’re going to the Hill!” she says. “Now I see Hill staffers with nose rings.” The 20-somethings have helped Washington shed its image as an uptight, work-first, party-later town. “Happy hour is the most important hour of the day,” says Emily Schultheis, a Web editor and recent arrival. “It’s how you meet people, how you get jobs, how you find roommates, how you get tips for stories and how you get in trouble.” Hill staffers devote Thursday nights to “wheels up” parties. “Congress goes out of session on Thursdays,” says Abra Belke, a lobbyist and blogger who calls herself Belle and writes the popular blog Capitol Hill Style. “Most of the bosses go home for the weekend. So you put your boss on the plane, wheels up, and then—freedom!”

Über-Washington has its own career pattern that is becoming as routinized as that of a 1950s organization man. A student graduates and goes to Washington for an internship, usually unpaid, which qualifies her for another internship, perhaps paid, until an entry-level job is offered, as it almost always will be. “Then you work for a few years,” Glickfield explains, “and then you go off and get the next degree, law or business, and then you come back for a better job.” Colleges and universities have figured this out and moved quickly to get a place on the conveyor belt. Big state schools and smaller liberal-arts colleges occupy office buildings in the city, where they run sophisticated internship programs designed to place their graduates (and soon-to-be graduates) in one of the country’s few hot job markets.

As national politics makes it impossible to expand government explicitly, these interns—often underpaid, usually ­overworked and frequently subsidized by their parents—have become vital to keeping government going. At the same time, they contribute to a feature of über-­Washington that too often goes un­remarked: the capital has one of the most lopsided distributions of wealth of any major metropolitan area in the U.S. Along with a higher per capita income than any state and one of the nation’s lowest rates of unemployment, Washington has a poverty rate of nearly 20%, above the national average of 15%; a public-school system that is often called the worst in the nation; and a crime rate that remains higher than in any other rich community. In the district, whites enjoy a per capita income nearly three times that of African Americans.

You can often see the maldistribution of Washington’s riches block by block—even on the same block, row house by row house—as young, well-to-do high achievers move into neighborhoods that real estate agents label hot, buying up properties, planting flower boxes and tending little squares of lawn behind wrought-iron fences, next to an abandoned building or a vacant lot or a home where a fatherless family is just scraping by. Most über-­Washingtonians say they like the urban grit. The crime and decay amid the plenty, says local activist Danny Harris, “are the price you pay if you want to live in an urban environment.” The disequilibrium especially bothers Harris, he says, when it signals a civic detachment among his fellow young strivers. “You can have people who know every nuance of our policy toward Burma,” he says, “but they don’t know the name of the public school down the block.”

Greener than Thou

Socially and culturally, life in über-Washington can seem as insular as its economy, and the insularity has ­consequences for the rest of the country. Über-Washingtonians, for instance, are intensely concerned about the environment. The local economy bristles with company names like GreenBrilliance and SkyBuilt Power. But the unreal character of that economy makes it easy for Washingtonians to overestimate the ability or the desire of their fellow Americans to live as they do. In über-Washington, the private automobile is looked on as at best a necessary nuisance and at worst a morally suspect source of sprawl and climate change. Many Washingtonians are eager to tell you they don’t own one, preferring a highly subsidized commute on the Metro system’s carpeted (if often unreliable) subway cars. Even Uber, the limo service, has been hailed on blogs as a green innovation, notwithstanding its emanations of conspicuous consumption. Bike-share racks have sprung up downtown and in the close-in suburbs to take advantage of the newly painted bike lanes that have squeezed grand thoroughfares like 14th Street down to two lanes. Local authorities have reserved hundreds of parking spaces exclusively for Zipcars, which customers rent for an hour or a day in place of buying a car of their own. The Zipcar motto: “Cars with a conscience.”

No doubt the conscience thrives as much in Youngstown, Ohio, as it does in Washington, but you don’t see many locals there trading their minivans for Zipcars or rent-a-bikes. Fracking for natural gas is regulated from Washington, where it is viewed with suspicion; in Pennsylvania and North Dakota, it is a source of potential riches and a better life. The sight of an oil platform may lift the heart of a worker struggling on the Gulf Coast; über-Washingtonians have a different ­impression. In D.C., if in few other places, half a billion dollars lost to a solar company like Solyndra can seem to be the price of being conscientious. At the same time, life in Washington is so comfortable that it is easy for those living there to imagine that the rest of the country is doing just fine too. Aren’t restaurants in your hometown packed at 10 p.m. on a Monday? No? Really?

No End in Sight

How long can such a culture of complacency last, even one as heavily subsidized by a country as rich as the U.S., in the face of awesome government debt?

It is a soft spring evening. The office buildings downtown are emptying out, and the bars are filling up for happy hour. Uber cars are out in force, Town Cars and Benzes rolling down 14th, up Ninth, under the overspreading oaks of Logan Circle and back down Vermont, past the Churchkey, where 555 kinds of beer are on offer. Its list gives each beer’s alcohol content and country of origin, the hops used to brew it and the temperature at which it will be served. The menu offers nibbles from the other America, served with the requisite irony: disco fries, a staple of the Jersey Shore, and a deep-fried macaroni-and-cheese stick familiar to fans of Midwestern state fairs. There’s also pricey charcuterie for those who don’t get the joke. Seven blocks east and a few blocks south, at the edge of the Penn Quarter neighborhood, six diners take their places at Minibar. In a city quickly becoming famous for tony restaurants, they are the luckiest feeders of the night: Minibar takes reservations a minimum of a month in advance for six seats from supplicants who must call precisely at 10 a.m., usually for several days in a row, sometimes for weeks. The meal they savor has 25 to 30 courses. The cost: $150.

The optimism of über-Washingtonians so far survives the unspoken worry about a coming age of austerity, in which government spending cuts would end the high life that Washingtonians have come to expect. They are right to be optimistic. The two most plausible deficit-reduction proposals—one by President Obama, the other by the Republican-controlled House Budget Committee—each calls for the government in 2021 to spend a trillion dollars more than it spends today.

]]>13637Sun, 27 May 2012 21:03:33 +0000Richard Salsman's review of Buechner's Objective Economicshttp://forums.4aynrandfans.com/index.php?/topic/13607-richard-salsmans-review-of-buechners-objective-economics/A surprising critical commentary at TOS.
]]>13607Wed, 02 May 2012 17:30:35 +0000Greecehttp://forums.4aynrandfans.com/index.php?/topic/13625-greece/I was reading today about the current economic troubles in Greece, which, according to the article (and the author is probably correct), could adversely effect the rest of Europe and, eventually, the world.

I am a complete ignoramus in the area of economics. But, when reading that article, I wondered: When it comes to the United States, isn't there something wrong--somewhere--when our own economy's condition or fate can be determined by what happens economically in another country? Is there something wrong with this picture? Or is that just the way things are?

There are ethical corporations, yes, and ethical businesspeople, but ethics in capitalism is purely optional, purely extrinsic. To expect morality in the market is to commit a category error. Capitalist values are antithetical to Christian ones. (How the loudest Christians in our public life can also be the most bellicose proponents of an unbridled free market is a matter for their own consciences.) Capitalist values are also antithetical to democratic ones. Like Christian ethics, the principles of republican government require us to consider the interests of others. Capitalism, which entails the single-minded pursuit of profit, would have us believe that it’s every man for himself.

There’s been a lot of talk lately about “job creators,” a phrase begotten by Frank Luntz, the right-wing propaganda guru, on the ghost of Ayn Rand. The rich deserve our gratitude as well as everything they have, in other words, and all the rest is envy.

First of all, if entrepreneurs are job creators, workers are wealth creators. Entrepreneurs use wealth to create jobs for workers. Workers use labor to create wealth for entrepreneurs — the excess productivity, over and above wages and other compensation, that goes to corporate profits. It’s neither party’s goal to benefit the other, but that’s what happens nonetheless.

...

Sasha

]]>13624Tue, 15 May 2012 23:52:29 +0000Economics in One Lesson, in Chinahttp://forums.4aynrandfans.com/index.php?/topic/13483-economics-in-one-lesson-in-china/China

In 1978, the farmers in a small Chinese village called Xiaogang gathered in a mud hut to sign a secret contract. They thought it might get them executed. Instead, it wound up transforming China's economy in ways that are still reverberating today.

The contract was so risky — and such a big deal — because it was created at the height of communism in China. Everyone worked on the village's collective farm; there was no personal property.

So, in the winter of 1978, after another terrible harvest, they came up with an idea: Rather than farm as a collective, each family would get to farm its own plot of land. If a family grew a lot of food, that family could keep some of the harvest.

..........

"We all secretly competed," says Yen Jingchang. "Everyone wanted to produce more than the next person."

It was the same land, the same tools and the same people. Yet just by changing the economic rules — by saying, you get to keep some of what you grow — everything changed.

At the end of the season, they had an enormous harvest: more, Yen Hongchang says, than in the previous five years combined.

]]>13483Sun, 29 Jan 2012 13:18:26 +0000Helpful pamphlet on the Great Depressionhttp://forums.4aynrandfans.com/index.php?/topic/13451-helpful-pamphlet-on-the-great-depression/Here's a 14-minute lecture on the pamphlet by the author:

]]>13451Fri, 30 Dec 2011 19:32:17 +0000Ten Years that helped to save capitalism...http://forums.4aynrandfans.com/index.php?/topic/13428-ten-years-that-helped-to-save-capitalism/Read of the doings of John James Cowperthwaite whose administration of Hong Kong between 1961 and 1971 turned Hong Kong into a capitalist dynamo. Hong Kong under British governance is the closest the world has come to genuine capitalism.

Capitalism just doesn't happen (by magic or chance), it has to be built and nurtured.

ruveyn

]]>13428Sat, 10 Dec 2011 16:45:15 +0000New essay: "How the Economy Works" by M. Northrup Buechnerhttp://forums.4aynrandfans.com/index.php?/topic/13427-new-essay-how-the-economy-works-by-m-northrup-buechner/Professor M. Northrup Buechner of St. John’s University has posted an essay entitled, "How the Economy Works." It goes along with his new book, Objective Economics: How Ayn Rand's Philosophy Changes Everything About Economics.

Essentially, his book explains a new theory of how prices work. He discards the modern view of economics and casts prices in terms of the objective-subjective-intrinsic trichotomy that Objectivists are familiar with. I'm in the middle of reading the book now, and I like it so far.

He has granted permission allowing anyone to post or republish the essay, as long as it is reproduced in its entirety. I decided to make an attractive two-column PDF version of it, which I've posted here: http://ohpcenter.org...s-handouts.php.

(I also corrected one typo that was in the web text. "choses" > "chooses".)

Enjoy,

Jared

]]>13427Fri, 09 Dec 2011 13:25:34 +0000Gold strategyhttp://forums.4aynrandfans.com/index.php?/topic/10232-gold-strategy/My business has a non-trivial amount of cash accumlated over 20 years that I would like to protect from the (IMHO) soon-to-be-worse financial crisis and inflation. I'm thinking of converting a significant portion from a money-market fund (Dreyfus) to GLD, an exchange-traded fund that holds gold.

Any advice on if this is a good idea? I realize this is riskier than cash due to price fluctuations, but I can't imagine what gold is going to have to do, long run, with the irresponsibility our government is showing.

Also, if it was your money, would you jump in with both feet, or dollar-cost-average (DCA) over a period of time? If DCA, how often/how long would you buy? For example, would you only switch 50% of your cash to GLD, and convert that amount 20% at a time over five months? Etc.?

Thanks,

--Larry

]]>10232Wed, 29 Apr 2009 23:28:03 +0000Paul Farrell writes of Ayn Randhttp://forums.4aynrandfans.com/index.php?/topic/13341-paul-farrell-writes-of-ayn-rand/".....Dalio also discovered that “one of the greatest sources of problems in our society arises from people having loads of wrong theories in their heads.” Get it? Most people’s heads are loaded with “wrong theories,” a limitation for world leaders — financial, corporate and political — as well as the 99% masses...." ----I agree with Dalio as much as I can agree with anybody about anything.

OK, this is a recent op.ed. by Paul Farrell. I'm actually a fan of Paul's because he pushes the boundaries. But, don't get your skivies in a bind over me posting this here. I do not agree with Paul's criticisms of Rand. I don't think he gets it. But, I appreciate the article, still. I've been in touch with Paul in the past and he and I do not agree about some things. I thought you might find this interesting.

Shortly after class, an economics student approaches his economics professor and says, "I don't understand this stimulus bill. Can you explain it to me?"

The professor replied, "I don't have any time to explain it at my office, but if you come over to my house on Saturday and help me with my weekend project, I'll be glad to explain it to you."

The student agreed. At the agreed-upon time, the student showed up at the professorʼs house.

The professor stated that the weekend project involved his backyard pool. They both went out back to the pool, and the professor handed the student a bucket.

Demonstrating with his own bucket, the professor said, "First, go over to the deep end, and fill your bucket with as much water as you can." The student did as he was instructed.

The professor then continued, "Follow me over to the shallow end, and then dump all the water from your bucket into it."

The student was naturally confused, but did as he was told.. The professor then explained they were going to do this many more times, and began walking back to the deep end of the pool.

The confused student asked, "Excuse me, but why are we doing this?" The professor matter-of-factly stated that he was trying to make the shallow end much deeper. The student didn't think the economics professor was serious, but figured that he would find out the real story soon enough.

However, after the 6th trip between the shallow end and the deep end, the student began to become worried that his economics professor had gone mad.

The student finally replied, "All we're doing is wasting valuable time and effort on unproductive pursuits. Even worse, when this process is all over, everything will be at the same level it was before, so all you'll really have accomplished is the destruction of what could have been truly productive action!"

The professor put down his bucket and replied with a smile, "Congratulations. You now understand the stimulus bill."

]]>13332Fri, 23 Sep 2011 02:04:09 +0000More Money than Godhttp://forums.4aynrandfans.com/index.php?/topic/12895-more-money-than-god/I read a lot of books. It's par of the course with my job - the better you understand the world, the more money you can make. Out of the several dozen books on finance/economics that are piling up on my bookshelf, a few occasionally stand out because they are exceptionally well written, because their content is exceptionally interesting, or both. Examples are King of Oil (the story of Marc Rich, the man responsible for you paying the market price for gas at the pump), Greatest Trade Ever (how could one man make close to 5 billion USD as a personal bonus in just one year? this will also appeal to any cultural contrarians, which currently means most Objectivists), but also more complex, harder to understand books such as Invisible Hands and Inside The House of Money by Drobny (both going through exceptional hedge fund managers' tactics via personal and very detailed interviews, but both requiring some background in economics and investing to be readable).

More Money than God is striking a good balance. It is exceptionally well written, the content is excellent, but it is also readable by the average person in the street, and indeed should be read by the average person in the street before they start investing their savings.

The book goes through the history and tactics used by the greatest names in 20th century investing, tracing the history of hedge funds, which have since the mid-20th century been the place of choice for the best talent in investing. To paraphrase an economist (and Commodities Corporation co-founder) quoted by Mallaby, if you have investing talent that is far above the norm, why rent it out for a low fee to a large company when you can keep the gains for yourself? Hedge funds are the Google and Apple of the investment world, including in size and power. They are where you find the best talent and the most cutting-edge thinking.

The first hedge fund, and the origin for the name, was Alfred Winslow Jones' investment partnership, which he called a "hedged fund". Proving once again that, outside the sciences, practice often precedes academia, Jones set up most of the innovations of both the hedge fund world and academia. He was the first to reward managers based on the performance of their ideas, the first to "hedge" his bets by shorting (selling) bad stock as well as going long (buying) good ones, the first to diversify, to extract the performance of a manager (alpha), from that of the market (beta... well, this is not quite right but enough for the finance luddite) so that he wouldn't pay his managers fortunes when they had just floated up with everybody else.

Jones was interesting because he had none of the profile of the typical manager you see today. There was no PhD in economics, no MBA from Harvard. In fact, Jones was a fervent anti-capitalist, and had spied in Germany for the count of communists. He started his "hedged fund" (which the press misread as "hedge fund", popularising the later expression) very late in life, purely because he needed money to fund his socialist causes. Like a later investment great, George Soros, he spent his life tortured between his irrational philosophy and the evidence that a daily encounter with reality that every market player has brought to his eyes.

The book covers the history and great trades of several legendary managers, dispelling many myths about their trades (such as the common one that Soros "broke the pound" because he disliked John Major's Conservative government - in reality, Soros like any manager never FORCED markets, he merely acted as a catalyst for much needed readjustment). It also acts as an investment education the quality of which you will never get from a Masters in Finance or other prestigious qualification. It goes through the dilemma between the equity types, brought up on Graham and Dodd, believing that so long as you buy undervalued companies they will eventually go up so you should hold them and take the losses for now, and the commodity types, trend surfers who will get out of positions if the market moves against them to limit damages, and the men who bridged the gap between both. There are several very important takeaways, for example the notion (discovered first hand by Robertson, luckily in time for him to pull out) that European companies that appear strongly undervalued by American valuation standards are actually fairly valued, because they are run by Europeans which means for their employees, not shareholders. Mallaby paints a vivid picture of Robertson realizing that the planes taking off in front of the headquarters are in fact free pilots' license training available for all employees of the West German corporation he had just invested in, and a call to his trader followed very rapidly.

The most interesting takeaway, for me, was Mallaby's explanation of the rise of efficient market theory and the reason for which global macro investors (investors that bet on anything, anywhere, based on political or other themes) have dominated the hedge fund world since the drop of the gold standard. The Efficient Market Hypothesis, which states that markets at all times reflect the information available in the world and thus that you cannot make money, was developed in the stable world of gold standard post-war USA academics, in the most stable academic institutions. Subsequently, fiscal discipline disappeared as states could devalue their currencies at will to fund the bribes they promised their electorates. Coupled with oil shocks and events like the breakdown of the USSR, from the 70s onwards the world became very volatile, making it a great hunting ground for people with an understanding of history, economics, and psychology.

You will also certainly enjoy the insight into Soros' mind (although Druckenmiller, not Soros, invested Soros' money from the 1980s onwards; something neither the publicity-shy Druckenmiller nor the publicity-loving Soros were particularly willing to promote). It is well known that Soros' failed philosophy was a huge draw on his investing track record, which is nothing short of extraordinary. Soros' talent is rare because he is able to ride a bubble upwards, and downwards. Most investors either bet on things eventually breaking down (like John Paulson and the mortgage crisis), or on things eventually getting better (such as Seth Klarman, an expert in buying undervalued assets in bankrupcy proceedings or elsewhere). Soros will detect a bubble forming, go long, detect the top, and reverse his position 100% to capture the downside. His theory of reflexivity, which states that investors affect the outcomes of market events (for example, investors believing in real estate investment trusts will provide them with the cheap capital needed for them to do well, thus creating a self-fulfilling prophecy) is very important to understanding today's volatile and often "irrational" markets. Unfortunately, he derived it from Karl Popper's philosophy, which is also the reason for which he funds Democratic causes and the Open Society Institute, arguably our biggest intellectual enemy. Fortunately, he is the exception - most hedge fund managers are staunch individuals who understand reality first hand, and thus almost never vote Democrat, with rare exceptions (David Einhorn, who still skewered Obama in his Feb 2010 letter, Bill Gross and Warren Buffett come to mind).

I strongly recommend this book even for those who are not active investors.

]]>12895Sat, 26 Feb 2011 09:28:00 +0000Salsman on “Is the U.S. a no-default zone?”http://forums.4aynrandfans.com/index.php?/topic/13236-salsman-on-“is-the-us-a-no-default-zone”/The National Post of Toronto published an excerpt of THE FORUM expert Richard Salsman's article "Sovereign Debt Turmoil: Political Causes and Investment Consequences".

The full article is probably available to his clients.

If the link above does not work for you, try searching the Post's website for the name Richard Salsman.

]]>13236Tue, 02 Aug 2011 00:16:27 +0000Boehner Planhttp://forums.4aynrandfans.com/index.php?/topic/13225-boehner-plan/I'm not sure whether to call this a victory or a stealth defeat with possibly bad political repercussions to come. What do other's think?

Either way Comrade Carlos is eagerly awaiting his trillion dollar bills that the treasury will be printing off in the future. It will make for good fire-starting tender when I'm raising my children in the wilds of the "Mad-Max"-like post-apocalyptic economic wasteland of America.

]]>13225Wed, 27 Jul 2011 15:38:37 +0000What is the debt limit and why do we have one?http://forums.4aynrandfans.com/index.php?/topic/13201-what-is-the-debt-limit-and-why-do-we-have-one/The Debt Limit

Total debt of the federal government can increase in two ways. First, debt

increases when the government sells debt to the public to finance budget deficits and

acquire the financial resources needed to meet its obligations. This increases debt

held by the public. Second, debt increases when the federal government issues debt

to certain government accounts, such as the Social Security, Medicare, and

Transportation trust funds, in exchange for their reported surpluses. This increases

debt held by government accounts. The sum of debt held by the public and debt held

by government accounts is the total federal debt.

Surpluses generally reduce debt held by the public, while deficits raise it. The

government’s surpluses during FY1998-FY2001 reduced debt held by the public by

$448 billion. The debt holdings of government accounts grew by $853 billion over

the same period. The total net change raised total federal debt by $405 billion.

A statutory limit has restricted total federal debt since 1917 when Congress

passed the Second Liberty Bond Act. Congress has raised the debt limit five times